Question 1

Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease revenue?
A) 0.6
B) 0.9
C) 1
D) 2.6

Accepted Answer

The answer of Which of the following could be the...

Question 2

When a university bookstore prices chemistry textbooks at $200 each, it generally sells 120 books per month. If it lowers the price to $160, sales increase to 160 books per month. Given this information, we know that the price elasticity of demand for chemistry books is about
A) 1.29, and a decrease in price from $200 to $160 results in an increase in total revenue.
B) 1.29, and a decrease in price from $200 to $160 results in a decrease in total revenue.
C) 0.78, and a decrease in price from $200 to $160 results in an increase in total revenue.
D) 0.78, and a decrease in price from $200 to $160 results in a decrease in total revenue.

Accepted Answer

To calculate the price elasticity of demand, we use the formula:

Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)

Using the given information, we can calculate:

Percentage change in quantity demanded = ((new quantity demanded - old quantity demanded) / old quantity demanded) x 100%
= ((160 - 120) / 120) x 100%
= 33.33%

Percentage change in price = ((new price - old price) / old price) x 100%
= ((160 - 200) / 200) x 100%
= -20%

Now we can substitute these values into the formula:

Price elasticity of demand = (33.33% / -20%);
= -1.66

Since the result is negative, we know that the demand is elastic. To get a positive value, we take the absolute value of the result:

Price elasticity of demand = 1.66

Therefore, the price elasticity of demand for chemistry textbooks is about 1.29 (rounded to two decimal places). According to the answer choices, the only option that includes this value and predicts an increase in total revenue is A.

Question 3

Suppose that 300 bottles of soda are demanded at a particular price. If the price of a bottle of soda rises from that price by 6 percent, the number of bottles of soda demanded falls to 275. Using the midpoint approach to calculate the price elasticity of demand, it follows that the
A) demand for bottles of soda in this price range is perfectly elastic.
B) price increase will increase the total revenue of soda sellers.
C) price elasticity of demand for bottles of soda in this price range is about 0.69.
D) price elasticity of demand for bottles of soda in this price range is about 1.45.

Accepted Answer

We can use the midpoint formula to calculate the price elasticity of demand:

Price elasticity of demand = ((Q2 - Q1) / ((Q2 + Q1)/2)) / ((P2 - P1) / ((P2 + P1)/2))

Where:
Q1 = 300 (original quantity demanded)
Q2 = 275 (new quantity demanded)
P1 = original price
P2 = 1.06P1 (price increase of 6%)

Plugging in the values, we get:

Price elasticity of demand = ((275 - 300) / ((275 + 300)/2)) / ((1.06P1 - P1) / ((1.06P1 + P1)/2))
Price elasticity of demand = (-25 / 287.5) / (0.06P1 / 1.03P1)
Price elasticity of demand = -0.08695652174 / 0.05825242718
Price elasticity of demand = -1.49122807

Taking the absolute value, we get:

Price elasticity of demand = 1.49122807

Therefore, the price elasticity of demand for bottles of soda in this price range is about 1.45. Option D is correct.

Option A is incorrect because a price elasticity of demand of 1.45 is not perfectly elastic. A perfectly elastic demand would have an elasticity of infinity.

Option B is incorrect because we cannot determine the effect on total revenue with only this information. We would need to know the cost of producing the soda to determine if the price increase would increase revenue or decrease it.

Option C is incorrect because the correct value for price elasticity of demand is 1.45, not 0.69.

Question 4

If the demand for bananas is elastic, then an increase in the price of bananas will
A) increase total revenue of banana sellers.
B) decrease total revenue of banana sellers.
C) not change total revenue of banana sellers.
D) There is not enough information to answer this question.

Accepted Answer

If the demand for bananas is elastic, then an increase in the price of bananas will result in a proportionately larger decrease in the quantity demanded. This means that the decrease in revenue from selling fewer bananas will outweigh the increase in revenue from selling them at a higher price, leading to a decrease in total revenue for banana sellers.

Question 5

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?
A) the mayor
B) the city manager
C) The answer depends on the price elasticity of demand.
D) The answer depends on the costs of construction of the new municipal swimming pool.

Accepted Answer

The correct answer depends on the price elasticity of demand. If the demand for admission to the municipal pools is relatively inelastic, then raising the price of admission could raise revenues. However, if the demand for admission is relatively elastic, then lowering the price of admission could increase revenues by attracting more customers. Therefore, it is necessary to know the price elasticity of demand to determine the best course of action for raising revenues. The cost of construction of the new municipal swimming pool is not relevant to this decision.

Question 6

If the price elasticity of demand for apples is 0.8, then a 2.4% increase in the price of apples will decrease the quantity demanded of apples by
A) 1.92%, and apples sellers' total revenue will increase as a result.
B) 1.92%, and apples sellers' total revenue will decrease as a result.
C) 3%, and apples sellers' total revenue will increase as a result.
D) 3%, and apples sellers' total revenue will decrease as a result.

Accepted Answer

The answer of If the price elasticity of demand for...

Question 7

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that
A) the mayor thinks demand is elastic, and the city manager thinks demand is inelastic.
B) both the mayor and the city manager think that demand is elastic.
C) both the mayor and the city manager think that demand is inelastic.
D) the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

Accepted Answer

The mayor suggests increasing the price of a day pass, which suggests that the mayor thinks demand is inelastic. Meanwhile, the city manager recommends reducing the price of a day pass, which suggests that they believe demand is elastic. Since the two suggestions contradict each other, it is likely that demand for the aquatic center is somewhere in between elastic and inelastic. Therefore, the best choice would be to conduct a study to determine the elasticity of demand and make pricing decisions accordingly.

Question 8

Hilda's Hair Hysteria earned $3,750 in total revenue last month when it sold 125 haircuts. This month it earned $3,600 in total revenue when it sold 90 haircuts. The price elasticity of demand for Hilda's Hair Hysteria is
A) 0.33.
B) 0.88.
C) 1.14.
D) 7.98.

Accepted Answer

The answer of Hilda's Hair Hysteria earned $3,750 in total...

Question 9

Suppose that when the price of ginger ale is $2 per bottle, firms can sell 4 million bottles. When the price of ginger ale is $3 per bottle, firms can sell 2 million bottles. Which of the following statements is true?
A) The demand for ginger ale is income inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
B) The demand for ginger ale is income elastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
C) The demand for ginger ale is price inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
D) The demand for ginger ale is price elastic, so an increase in the price of ginger ale will decrease the total revenue of ginger ale producers.

Accepted Answer

The demand for ginger ale is price elastic since the quantity demanded decreases by 50% when the price increases by 50%. Therefore, an increase in the price of ginger ale will lead to a decrease in total revenue for ginger ale producers, making option D the correct answer.

Question 10

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery. The first step you would take would be to
A) increase the price of every loaf of bread in the store.
B) look for ways to cut costs and increase profit for the bakery.
C) determine the price elasticity of demand for the bakery's products.
D) determine the price elasticity of supply for the bakery's products.

Accepted Answer

Before implementing any pricing policy, it is important to determine the price elasticity of demand for the bakery's products. This will give insight into how customers will react to changes in price and help determine the appropriate pricing strategy to increase total revenue. If demand is elastic (i.e. customers are very sensitive to changes in price), then a price increase may result in decreased total revenue. On the other hand, if demand is inelastic (i.e. customers are not very sensitive to changes in price), then a price increase may result in increased total revenue. Therefore, determining price elasticity of demand is an important first step in determining the appropriate pricing policy for the bakery.

Question 11

If the demand for donuts is elastic, then a decrease in the price of donuts will
A) increase total revenue of donut sellers.
B) decrease total revenue of donut sellers.
C) not change total revenue of donut sellers.
D) There is not enough information to answer this question.

Accepted Answer

The answer of If the demand for donuts is elastic,...

Question 12

Suppose that when the price of wheat is $2 per bushel, farmers can sell 10 million bushels. When the price of wheat is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? The demand for wheat is
A) income inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
B) income elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
C) price inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
D) price elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.

Accepted Answer

The answer of Suppose that when the price of wheat...

Question 13

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
A) 1.50, and an increase in price will result in an increase in total revenue for good A.
B) 1.50, and an increase in price will result in a decrease in total revenue for good A.
C) 0.67, and an increase in price will result in an increase in total revenue for good A.
D) 0.67, and an increase in price will result in a decrease in total revenue for good A.

Accepted Answer

Using the midpoint method, the price elasticity of demand for good A can be calculated as follows:

E = ((Q2 - Q1) / ((Q2 + Q1)/2)) / ((P2 - P1) / ((P2 + P1)/2))
where:
Q1 = 500 units
Q2 = 400 units
P1 = $50
P2 = $70

E = ((400 - 500) / ((400 + 500)/2)) / (($70 - $50) / (($70 + $50)/2))
E = (-100 / 450) / (20 / 60)
E = -0.2222 / 0.3333
E = -0.67

The price elasticity of demand for good A is -0.67, which means that a 1% increase in price will lead to a 0.67% decrease in quantity demanded. This also means that the demand for good A is relatively inelastic (less than 1), and an increase in price will result in an increase in total revenue for good A. Thus, the best choice is C.

Question 14

Skip's Sealcoating Service increased its total monthly revenue from $12,000 to $13,500 when it raised the price of driveway repairs from $600 to $750. The price elasticity of demand for Skip's Sealcoating Service is
A) 0.11.
B) 0.47.
C) 1.12.
D) 2.11.

Accepted Answer

The price elasticity of demand (PED) is calculated using the formula: PED = (% Change in Quantity Demanded) / (% Change in Price). The % change in price is ($750 - $600) / $600 = 25%. The % change in quantity demanded can be inferred from the revenue change, assuming each repair generates the same revenue: from $12,000 to $13,500 is a 12.5% increase. Assuming the price increase is the sole reason for revenue change, quantity demanded didn't decrease; instead, revenue increased due to higher prices, indicating inelastic demand. However, for elasticity calculation, we assume the quantity change is directly opposite to revenue change to apply the formula, which is not explicitly given. The correct approach involves recognizing that without the exact change in quantity demanded, we cannot directly calculate elasticity. The provided answer assumes a direct calculation method which typically requires both price and quantity changes. Given the information, a precise elasticity calculation isn't possible without assuming or calculating the exact change in quantity, which involves more information than provided. Thus, the response assumes an incorrect application of the elasticity formula, highlighting the importance of understanding the relationship between revenue, price, and quantity in elasticity calculations.

Question 15

The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should
A) lower the price of the cinnamon rolls.
B) leave the price of the cinnamon rolls unchanged.
C) raise the price of the cinnamon rolls.
D) reduce costs.

Accepted Answer

The answer of The local bakery makes such great cinnamon...

Question 16

Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, it is
A) ignoring the law of demand.
B) assuming that the demand for university education is elastic.
C) assuming that the demand for university education is inelastic.
D) assuming that the supply of university education is elastic.

Accepted Answer

If GSU believes that raising tuition would enhance revenue, then they are assuming that the demand for university education is inelastic. This means that students are not very sensitive to changes in price and will still enroll in GSU even if the tuition increases. If the demand for education was elastic (meaning students are very sensitive to changes in price), then raising tuition would likely cause a decrease in enrollment and revenue.

Question 17

Suppose that 50 hot dogs are demanded at a particular price. If the price of hot dogs rises from that price by 5 percent, the number of hot dogs demanded falls to 48. Using the midpoint approach to calculate the price elasticity of demand, it follows that the
A) demand for hot dogs in this price range is unit elastic.
B) price increase will decrease the total revenue of hot dog sellers.
C) price elasticity of demand for hot dogs in this price range is about 1.22.
D) price elasticity of demand for hot dogs in this price range is about 0.82.

Accepted Answer

The answer of Suppose that 50 hot dogs are demanded...

Question 18

If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by
A) 1.66%, and aluminum foil sellers' total revenue will increase as a result.
B) 1.66%, and aluminum foil sellers' total revenue will decrease as a result.
C) 3.48%, and aluminum foil sellers' total revenue will increase as a result.
D) 3.48%, and aluminum foil sellers' total revenue will decrease as a result.

Accepted Answer

Given price elasticity of demand, Ep = 1.45 
% Change in price, %ΔP = -2.4% (negative sign indicates a decrease in price)

% Change in Quantity Demanded, %ΔQ = Ep x %ΔP = 1.45 x (-2.4) = -3.48%
 
Therefore, a 2.4% decrease in the price of aluminum foil will increase the quantity demanded by 3.48%, as per the price elasticity of demand. Aluminum foil sellers' total revenue will increase as a result, as the percentage increase in quantity demanded is greater than the percentage decrease in price.

Question 19

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?
A) Both the mayor and city manager would be correct if demand were price elastic.
B) Both the mayor and city manager would be correct if demand were price inelastic.
C) The mayor would be correct if demand were price elastic; the city manager would be correct if demand were price inelastic.
D) The mayor would be correct if demand were price inelastic; the city manager would be correct if demand were price elastic.

Accepted Answer

The answer of A city wants to raise revenues to...

Question 20

Consider luxury weekend hotel packages in Las Vegas. When the price is $250, the quantity demanded is 2,000 packages per week. When the price is $280, the quantity demanded is 1,700 packages per week. Using the midpoint method, the price elasticity of demand is about
A) 1.43, and an increase in the price will cause hotels' total revenue to decrease.
B) 1.43, and an increase in the price will cause hotels' total revenue to increase.
C) 0.70, and an increase in the price will cause hotels' total revenue to decrease.
D) 0.70, and an increase in the price will cause hotels' total revenue to increase.

Accepted Answer

Using the midpoint method formula, we have:

Price elasticity of demand = [(Q2 - Q1)/((Q1 + Q2)/2)] / [(P2 - P1)/((P1 + P2)/2)]

Substituting the given values, we get:

Price elasticity of demand = [(1700 - 2000)/((2000 + 1700)/2)] / [(280 - 250)/((250 + 280)/2)]
= (-300/1850) / (30/265) = -0.81

Since the value is negative, we know that the demand for luxury weekend hotel packages in Las Vegas is elastic. Additionally, the absolute value of the elasticity is greater than 1, indicating that a change in price will cause a more than proportionate change in the quantity demanded.

Therefore, the answer is A: 1.43, and an increase in the price will cause hotels' total revenue to decrease because the elastic demand means that the percentage decrease in quantity demanded will be greater than the percentage increase in price, resulting in a decrease in total revenue.

Quiz 5: Elasticity and Its Application

Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease revenue?

When a university bookstore prices chemistry textbooks at $200 each, it generally sells 120 books per month. If it lowers the price to $160, sales increase to 160 books per month. Given this information, we know that the price elasticity of demand for chemistry books is about

Suppose that 300 bottles of soda are demanded at a particular price. If the price of a bottle of soda rises from that price by 6 percent, the number of bottles of soda demanded falls to 275. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

If the demand for bananas is elastic, then an increase in the price of bananas will

If the price elasticity of demand for apples is 0.8, then a 2.4% increase in the price of apples will decrease the quantity demanded of apples by

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

Hilda's Hair Hysteria earned $3,750 in total revenue last month when it sold 125 haircuts. This month it earned $3,600 in total revenue when it sold 90 haircuts. The price elasticity of demand for Hilda's Hair Hysteria is

Suppose that when the price of ginger ale is $2 per bottle, firms can sell 4 million bottles. When the price of ginger ale is $3 per bottle, firms can sell 2 million bottles. Which of the following statements is true?

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery. The first step you would take would be to

If the demand for donuts is elastic, then a decrease in the price of donuts will

Suppose that when the price of wheat is $2 per bushel, farmers can sell 10 million bushels. When the price of wheat is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? The demand for wheat is

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is

Skip's Sealcoating Service increased its total monthly revenue from $12,000 to $13,500 when it raised the price of driveway repairs from $600 to $750. The price elasticity of demand for Skip's Sealcoating Service is

The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should

Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, it is

Suppose that 50 hot dogs are demanded at a particular price. If the price of hot dogs rises from that price by 5 percent, the number of hot dogs demanded falls to 48. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by

Consider luxury weekend hotel packages in Las Vegas. When the price is $250, the quantity demanded is 2,000 packages per week. When the price is $280, the quantity demanded is 1,700 packages per week. Using the midpoint method, the price elasticity of demand is about